Current Positions: I put my money where my mouth was on the 16th of March. Things did real well and peaked April 8th. CEF (close-end fund that holds REAL metal) has gone up. The remainder have been relatively flat since.

Cons: Counter-trend… a prediction… (one day I will listen to my own advice but I feel this in my gut)

Thoughts: It seems the markets are a little over extended. Not just one… just about EVERY one. Bernanke said QE2 will end in June. The Fed has pretty much kept the market propped up because of their quantative easing policies. The markets really didn’t react much. There’s still plenty of time until the end of June. The Fed will keep reinvesting the profits to continue the “easing.”

There’s quite a large drop in treasury purchases after QE2 ends. The absence of $75 billion in the auctions is going to be felt every month and obviously hasn’t been priced into the market yet. The reinvested dividends simply cannot make up for its absence. With two months to go I think we will start seeing declines sooner than later.

Other factors: SPX is approaching/in a price target determined by Elliott wave analysis. (Of course alternate counts can produce other targets.) The inverted head-and-shoulders price target is around 1,400. I feel we’re likely to see a decent pullback before then. Looking at the candles the upward momentum seems to be petering out… for the second time. Did I mention the MACD (and weak RSI) divergence?

QE2 has weakened the dollar a LOT. In fact we’re almost back to the levels just prior to the 2008 crash! Waves counts, S/R lines indicate a likely turn to dollar strengthening… at least before it resumes its downtrend. A strengthening dollar is negative for equities/commodities although it may take some time before their price changes as a result of a change in the ^USD.

The VIX is at a 46-month low. As we can see low levels of volatility don’t last forever and frequently result in corrections…. especially when volatility tanks. In addition, a sell signal was generated by the VIX when a candle formed outside the lower boilinger band and the next returned inside last week.

PM analysts have been calling for $1550-$1600 gold. Their wish has been granted, gold reached $1,569.80 on Friday. Silver is on a tear and FINALLY met a smidge of resistance at $50.00 causing a sharp correction (and pullback) after it hit $49.80 on the 25th. Time to start wave 4 in silver?

The seasons even speak to down trends. The summer months are not the friendliest to FOREX, equities, precious metals… and probably more.

Just Remember: The trend is your friend… But let’s face it, these rallies need a correction. It’s just a matter how soon. I’m voting for mid-May. I’ll be waiting to stack up SPXU.

I mentioned before the time to buy precious metals is during times of uncertainty. We have a few things going on: the Middle East, Iceland bankrupt, Ireland down the tubes… Portugal now! Will the euro survive? And that’s in addition to the lousy numbers the economy keeps producing. Yet somehow the markets keep climbing… oh wait that’s QE2 in action! Let’s see what happens in May/June when it comes to an end.

But what about recessions? Is that a good time to buy too? Economic numbers have not been stellar by any means during this “recovery.” Let’s look briefly at some of the big numbers that “influence” the market for February.

Retail Sales

Fell Short by 50%

TIC Long-Term Purchases

Fell Short by 33%

Durable Goods

ABYMSAL -3.6% Expected 0.4%

New Home Sales

Sucked

Existing Home Sales

Essentially Flat

GDP

Missed

March wasn’t much better. There’s a lot of repeats here: retail sales, both new and existing home sales, TIC LT purchases… all BELOW expectations! Durable goods was ABYSMAL again and consumer confidence dropped. We’re not out of the woods yet.

Let’s look at how the Fed has been printing money (data from St. Louis Fed). Yes that is a blue line seemingly headed straight for the sky. We had only $800B in base money (M0) before the crisis. It took 94 years to get there. The Fed tripled that in just three! All that base money looking for somewhere to go (at some point multiplied by the fractional reserve system). But it hasn’t found a spot yet. As we can see from this chart from ShadowStats.com, M3 the broadest money supply… oh wait I forgot to mention the Fed stopped reporting that in 2006. But luckily they release most of the numbers that M3 was based off of so it’s possible to recreate it with near perfect accuracy. As I was saying… M3 decreased during this time. So M0 increased but M3 decreased… Hmmmm. Only other time M3 decreased was the Great Depression.

Gold During Economic Expansion/Contraction

Well let’s see how gold fared during good times and bad. This chart was constructed with data from Prechter’s free eBook from Elliotwave International.
The charts start at the late-60′s because gold was fixed to the dollar before then at $35/oz. (Yes I know it wasn’t until AUG ’71 that Nixon removed us off Bretton Woods I’m just repeating the data from the eBook.) As you can see gold is not really correlated to good or bad economic times. But lets go back to thinking in terms of cycles… let’s take a look at the DGR (Dow/Gold Ratio) and gold stocks from 2000 to the present. That wimpy blue line on the bottom is the S&P 500 returns for a comparison.

Sometimes someone does such a good job explaining something it is silly to rehash it. Two videos are included below: Money as Debt (47 min.) and Money as Debt – II (77 min). Paul Grignon has done a great job in explaining this to the layman.

Money as Debt tells a computer animated tale of how the fractional banking system evolved giving simplified examples and then goes onto possible solutions. If you enjoyed the first movie you’ll enjoy the second as well.

Money as Debt – II rehashes the same principles but uses more specific examples.

Enjoy the movies!!!

Money as Debt

Money as Debt – II

Don’t believe a word they say? Pick up any banking textbook, learn about banking at the Khan Academy (a winner of Google’s 10^100 contest), perhaps wikipedia can provide the answers you seek. There are plenty of sources that all agree. If you follow the wiki link… you’re on a journey deep into the monetary rabbit hole for sure.

URG: UR-Energy, Inc.

Spotted: (MAR 15 2011) Perusing kitco.com, I read a post from Bill Matlack he occasionally puts out “Metals & Mining Analysts’ Ratings & Estimates.” I decided to pull up some charts on uranium companies because of the recent events in Japan.

Reasoning:

Psychological: Nuclear power will end!!! This is the next Chernobyl! My God the US will be irradiated from the fallout! Need I say more? Extreme market overreaction.

Technical: As seen from the chart the price has gone far outside the 2-20 Bollinger bands. Looking for a reversion to the mean. Keep in mind the stock is in a strong downtrend!

DISCLAIMER: I am not a financial expert. The views expressed on this page should not be construed as financial advice in any way. If you decide to follow any statements made on this page you do so under your own volition. Any results good or bad are the consequence of your own actions executed under your own free will after your own due diligence

Introduction

Why would you want to get into precious metals? There is a time and place for getting into any investment class. There was the 2000 tech bubble. There was the 2007 real estate bubble. There was the 1987 computer-aided crash.

All these bubbles burst. I’ve read many articles that say government and other entities should actively try and prevent these from occuring. Just look at the destruction of wealth from the real estate and resulting financial crashes around the globe. Obviously preventing such occurances that hurt so many people should be a priority right? Well they are a “natural” phenomena in financial markets. Preventing it is like trying to hold back real natural events like the recent earthquake and tsunami in Japan. It can’t be done.

Timing: Getting In

Generally precious metals do well in times of uncertainty like today. Gold is considered the ultimate in safety. It was one of the earliest forms of money. People flock to it. It’s also good to get into when the dollar is excessively weakened. And then there’s one other factor that’s a good indicator of when to get in.

The best time to get in was when you would’ve been mocked by your peers and financial advisor around 2000. They would’ve rolled on the floor laughing at you. Only a complete fool would get into precious metals. But you would be up 700% today. Who’s laughing now. And there is still a lot of room to go up.

Why was 2000 a good time to get in and is there room for further movement up? Answering this question brings us back to bubbles. I’ll get into this in greater detail in another article but it basically comes down to cycles. Which is really just another word for a bubble. The end point being you can never have one type of asset outvalue all others. An acre of land cannot be so valuable as to buy up the entire stock market, or all the copper, or oil, etc. The idea at its very core makes no sense whatsoever.

Somehow people don’t realize this. But it happens all the time and it cannot continue forever. At some point the different asset classes must correct themselves. This process began in 2000 with gold and equities/real estate. Now we have entered the commodity bubble.

What keeps this bubble afloat? Quantitative easing by the Fed (i.e. severly weakening the dollar), their ZIRP (Zero Interest Rate Policy) are two factors. You can look at technical charts like this as well. This was done by binve, a blogger primarily writing about Elliot Wave analysis in the markets. His blog is Market Thoughts and Analysis. “Amazingly” technical analysis like this almost always corresponds well to factors in fundamental analysis.

Basically the census of the current bunch of us crazy people is that we’re on our way to a Dow:Gold ratio of 1:1 or 0.5:1 before this is over. There are plenty of fundamental and technical reasons this could play out. This means at some point one ounce of gold will be equal to or twice the value of the Dow Jones Industrial Average. If this does occur you can see there is still plenty of room for gold to go up.

How to Easily Participate in Precious Metals

If you’ve ever spent some time looking into this you’ll find premiums, storage fees, shipping fees, insurance fees…. and more fees!!! Also if you have a Roth IRA like me in an equity account but want to participate there are a bunch of hurdles to jump through… and more fees… to roll it over to a self-directed precious metals Roth IRA.

So you’re looking at a big hit in fees?!?! Well I didn’t like this one bit. I can’t tell you how cheap I am. So I kept looking at different options. There is always holding the metals by “proxy” by investing in mining stocks. The one disadvantage of this is that the stocks can follow the broader market and not the metal price. So you could have them go down while gold goes up. Also mining companies can hedge with futures so they will lag the price of gold. This is good when gold is falling but not so good when it’s rising.

That said though I do have some mining stocks. I spent some time researching how to evaluate them when I considered picking individual companies. There’s a good article about evaluating mining companies at kitco.com. In the end though I decided to go with ETFs. It was much easier on my brain. I personally went with five:

GDX - Market Vectors Gold Miners

GDXJ – Market Vectors Junior Gold Miners

GLDX – Global X Gold Explorers

SIL – Global X Silver Miners

CEF – Central Fund Canada

If you’re looking just to invest in bullion in your equity IRA account without dealing with the hassles (and fees) of getting a precious metals IRA I like CEF over any other bullion ETF. One reason is that it is out of the U.S. Another is that if you hold it in a non-Roth account, specifically a regular trading account (non too sure about a traditional IRA. I’m no tax expert.) is that it is favorably treated tax-wise. It is considered a passive foreign investment company (15% LTCG) and will not fall under collectibles (28% LTCG) as the GLD and SLV ETFs do.

Another reason to consider CEF over GLD and SLV is that 90+% is backed by unleveraged bullion and it is routinely audited. If you’re wondering what leased bullion means… think of fractional reserve banking and apply it bullion. Forty or fifty people think they own the same piece of gold. If you’ve gone around the net and came across an article or two saying gold could reach $50,000 an ounce, this is why. Other reasons to avoid GLD/SLV are cited here.

If the idea of holding the physical metal appeals to you. My suggestion is BullionDirect.com. They have relatively low premiums for small orders. They run an exchange where you can find even tighter premiums (but they do charge a 1% clearing fee). They do not charge any storage fees. You can hold your metal there as long as you’d like and take possession of it whenever you want. So you can accumulate your holdings and pay shipping and insurance at your chosing and not every time you order.

If you are looking to learn more about assest cycles and precious metals (as well as other alternatives to equity markets) one site I have found very informative is the Elevation Group. It’s a subscription site (with two free introductory videos) that I personally have found very useful.

DISCLAIMER: I am not a financial expert. The views expressed on this page should not be construed as financial advice in any way. If you decide to follow any statements made on this page you do so under your own volition. Any results good or bad are the consequence of your own actions executed under your own free will after your own due diligence

A British tally stick. Arguably the most successful fiat currency and monetary system lasting almost 700 years. It was created during Henry II's rule circa 1160 and lasted until 1826 with the creation of the Bank of England.

Money is a set of objects that we can exchange for other things we value. These objects could be anything really. Typically we think of gold and silver as money before we had paper notes, but there have been lots of things used as money. One of these is the tally stick which is just a piece of wood! In the future it may be little 1′s and 0′s on a card.

I want to point out something important that you may or may not have noticed. We exchange money for something of value. But… money DOES NOT necessarily hold any value itself. In fact money in the United States has been pretty worthless for about 40 years.

That may be hard to wrap your head around. Just keep on repeating it until it sounds natural. I wouldn’t lead you astray on the first day of my blog. This little tid bit is probably the most important thing to understand because it will make things easier to grasp later on.

Its Origins

Barter was the first form of exchange. I had an extra cow, Bill had two goats, and a trade was made. This works out well when each person has something the other needs but not so much otherwise. This is the dual coincidence of wants problem. What are the chances I’ll meet someone that has what I want and I have something that they want?

To fix this problem we’ll need to use something to make trade easier. Gold and silver are classic examples. They were coined; each denomination had a standard weight and size. This was much easier to handle than cows, goats, shoes or whatever else a person really needed. And because of their luster these metals were given inherent value themselves. They really had no other practical value at the time except for looking pretty.

There’s always the shyster in the group. People used “Fool’s Gold” (pyrite, an iron-based mineral) as a substitute. They would shave coins. All those little filings add up after a little while and magically a new coin was born. Things like this, not to mention the weight of lugging bags of coins around, led to the introduction of paper notes.

Paper Money & the Rise of Fiat Currency

When they were first introduced, notes represented a certain amount of a commodity, typically gold or silver. Note-based monetary systems have been around since circa 960 A.D although they didn’t hit Europe until the mid 1600’s. Each system was backed by gold or silver reserves of their country until the Bretton Woods Agreement in 1944.

Bretton Woods gave rise to the Dollar Standard. Every county was given a decision on how to value their currency. They could allow it to float on the free market, peg it to the U.S. dollar at a fixed rate or to a basket of currencies. The dollar itself would be backed by gold and silver. This continued until August 15th, 1971 when Nixon abolished Bretton Woods and the dollar was now backed by nothing. Up until 1973 in the U.S. you could go into a bank and redeem your paper money for silver.

Technically speaking, fiat currency is one that is declared to be used as legal tender by government decree (fiat). So the goldsmith notes in England in 1660 were fiat money, same with U.S. notes prior to 1971. But when people use the term in conversation the meaning takes on an additional condition: the money has no intrinsic value. It is backed by nothing. Being backed by nothing there is no upper bound on the currency supply. It has the potential to be infinite.

Intrinsic vs. Nominal Value

Nominal value is another term for face value. Here look at these:

The U.S. twenty dollar note and 5¢ nickel with nominal values of 20 and 1/20 dollars respectively. The intrinsic values are quite different: nothing and, as of 12/28/2010, 6.5¢. If you really want a bang for your buck the penny (1909-1981 ex. 1943) is worth 2.85¢! Thinking about melting them? Well the government thought people might. They made it illegal in 2006.

I’m getting of on a tangent but this is a classic arbitrage opportunity. These are opportunities that exist when there is a difference in nominal and intrinsic value, or when two different parties have a different set of nominal buy/sell values for something, and the difference can be used to create “free money” until the markets correct themselves. (Or a government debases their currency… but they would “never” do that. )

The End

What I introduced indirectly in this article is a little thing called Gresham’s Law, which states that bad currency drives out good currency if their exchange rates are set by law. This will be addressed more directly in later articles.